Tags: Retirement | retirement | planning | 457

457s and Your Retirement Planning

By    |   Wednesday, 17 June 2015 01:20 PM

Section 457 of the U.S. Internal Revenue Code allows for deferred compensation retirement plan offered by state and local governments and certain limited types of nonprofit organizations.

In outline, the standard 457(b) plan resembles the more familiar 401(k) plan: An employee contributes a tax-deferred chunk of salary every pay period into an investment fund, up to a maximum annual amount — $18,000 as of 2015, with larger catch-up contributions allowed for plan holders over age 50, according to the IRS.

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In both plans, you pay taxes after retirement on money withdrawn from the account. But the two also differ in crucial ways.

In contrast to private-sector 401(k) plans, public employers generally do not offer to match contributions to 457(b) plans.

And outside of government, 457s are available only to senior executives at tax-exempt organizations — typically as a job sweetener, because 457s allow high-ranking managers to set aside larger amounts of tax-deferred income toward retirement. This is especially the case with a less common version of the plan called the 457(f).

Any 457 can be advantageous for someone wanting to use deferred compensation to "catch up" on retirement savings near the end of a career. In addition to the bonus contribution amounts for people older than 50, the 457(b) allows a worker to salt away even more tax-deferred money — up to two times the normal annual limit — in the final three years before retirement.

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Unlike 401(k) plans, there is no federal penalty for withdrawing money early — although regular taxes still apply to early withdrawals, according Kiplinger.

An employee can borrow money against a 457 and can roll it over into another account such as a 401(k), 403(b) or IRA in the event of a change of employers. The IRS maintains a rollover chart identifying which of these various defined contribution and deferred income retirement plans are transferable to one another, and which are not.

And if you happen to have a 401(k) and a 457(b) simultaneously, it is permissible to "max out" both — contribute the annual maximum amount to each. This effectively doubles your yearly tax-deferred retirement savings. In fact, the 457 is the only retirement plan whose contributions don't count against the contribution limits to another plan.

These plans also have been modified as of 2010 to accept Roth IRA contributions in some cases. The allocation depends on the account holder's future income needs and anticipated tax burdens.

"Having both pre-tax assets and Roth assets available in retirement can be a valuable benefit, allowing you to choose the source of funds most advantageous to your situation at the time of the distribution," according ICMA-RC, a financial services company providing 457s to public-sector employees.

However the pre- and after-tax contributions are allocated, the $18,000/$24,000 limit for a single 457 account still holds.

These designated Roth contributions to a 457 bypass one of the less beloved features of the traditional, standalone Roth IRA: the loss of tax deductibility for your contributions once your annual income rises above a certain amount.

In short, even if you earn six figures, Roth money tucked into your 457 is untouched by those particular IRS rules.

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Section 457 of the U.S. Internal Revenue Code allows for deferred compensation retirement plan offered by state and local governments and certain limited types of nonprofit organizations.
retirement, planning, 457
574
2015-20-17
Wednesday, 17 June 2015 01:20 PM
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